What will we drive tomorrow?

Automakers have long debated what the tipping point is that will push Americans into more fuel-efficient vehicles. Oil prices hit new highs this week and prices at the pump neared new records. Nationwide prices have averaged more than $3 for the past four months and prognosticators say $4 by spring.

In 2007, sales of large and midsize sport-utility vehicles plummeted while sales of small cars, once unpopular, are finally on the rise. As automakers bring their newest wares to town Saturday for the Greater St. Paul & Minneapolis International Auto Show, we ask the Big Five auto makers, and research and consulting firm, J.D. Power & Associates, whether Americans are changing their attitudes about fuel economy and, if so, how their research and development departments are planning for that.

Answering questions: Terry Cullum, director, corporate responsibility and environment and energy, General Motors Corp.; Sue Cischke, senior vice president of sustainability, environment and safety engineering at Ford Motor Co.; Dan Bonawitz, vice president, corporate planning and logistics, American Honda Motor Co.; John Hanson, national communications manager, Toyota Motor Sales USA; Nick Cappa, manager, advanced technology communications Chrysler; Mike Omotoso, senior manager of powertrain forecasting at research and consulting firm J.D. Power and Associates. Have we reached that tipping point where Americans will buy fuel efficient vehicles?

CHRYSLER: Yes. Most definitely. At Chrysler, we have shifted our truck to car ratio from 70/30 to 60/40. The company offers a variety of vehicles with fuel economy numbers above 25 miles per gallon. Going forward, we will build vehicles that customers demand and gas prices have a direct affect on select vehicle sales.

HONDA: Fuel prices have definitely had an effect. Gasoline prices at $2 per gallon didn't seem to have much impact, but at $3 per gallon on a sustained level, consumer attitudes and habits seemed to have changed. Gas prices are one part of the picture, but there are also widespread concerns about home values, the sub-prime loan crisis and a lot of recent press on declining consumer confidence and a potential recession.

TOYOTA: Yes we have. Gas prices are now affecting car sales based on fuel consumption.

FORD: The tipping point may have arrived for some consumers, but not all car buyers respond in the same way and not all have the same needs. For quite some time, even before gas prices began to increase, we saw a shift to smaller cars and more fuel efficient vehicles because of demographic factors. Demographics, in particular the life style changes for baby boomers, are a primary factor in driving shifts in vehicle segments. (Many baby boomers are now empty nesters and no longer need the same size vehicles as they did when they had younger children.) Meeting that trend is one of the reasons behind our shift to more cars and crossovers like the Edge. There is also clearly wider appeal for smaller vehicles and again, it is partly in response to demographic shifts. Young buyers tend to buy smaller vehicles like the Focus which has seen four straight months of gains. Higher gas prices have helped move fuel economy higher on the list of consumers' purchase considerations; so gas prices have accelerated a shift already underway.

J.D. POWER: We haven't reached the tipping point yet. When gas was $2 a gallon or less, we thought $3 a gallon would be the tipping point. But most consumers haven't changed their driving or buying habits that much. It's still not a big enough share of disposable income to change the behavior of most people making $40,000 a year or more. But at $4 a gallon, we're looking at $60-70 to fill the tank for a car and almost $100 to fill the tank of a truck. A $100 fill-up will get most people's attention regardless of income.

If not, when will we, or will people change their driving habits before they give up their SUVs, pickups and fast cars?

FORD: We do see a continued decline in SUV sales, but again, much of that is driven by demographics. Consumers choose a particular vehicle to fit their wants and needs. For some, those needs still require purchase of full-size SUVs and trucks, particularly for utility. Likewise, we see a segment of consumers still favoring sports and/or performance vehicles. So the challenge for us is how do we deliver the broad range of products that fit the wants and needs of all customers while also meeting the demand for more fuel efficient vehicles.

CHRYSLER: Some people will make the shift but not everyone finds a small car useful. The demand for larger vehicles still exists and performance remains important to consumers.

GM: At GM, we believe that no one solution is right for every part of the world, or even every consumer in any given market. So our approach is simple: offer as many choices as possible, to as many consumers as possible, everywhere we do business. And regardless of the fuel, regardless of the technology, our goal remains the same -- the best possible fuel economy for whatever type of vehicle our customers choose.

J.D. POWER: The segment of the population who can afford vehicles that cost over $50,000 can also afford gas at $3 or even $4 a gallon. The rappers and athletes who buy Escalades aren't affected by gas prices, and the millionaires and billionaires who buy Ferarris, Bentleys and Lamborghinis don't care about gas prices either. Gas is $6 or $7 a gallon in Europe and people there still buy cars and still drive them. But for blue collar and middle class consumers, prices consistently over $4 a gallon will change their habits.

Which of the various trade-offs for making vehicles more fuel-efficient -- horsepower, size, safety or higher costs -- do you think car buyers are most willing to accept?

GM: Well, most customers want it all. I'd say everything is on the table right now in terms of technologies and vehicle advancements that bring more efficiency. It is a delicate balance though because you can't always sacrifice one for the other. This is a challenge for auto makers -- to deliver the best, entire vehicle package to consumers.

FORD: Consumers have not indicated a willingness to make any tradeoffs -- they still want it all, fuel economy, performance, safety, comfort and affordability. We see consumers, at least in the U.S., continuing to want a broad range of choices without any sacrifices in the attributes they value. That is why we developed our near-term sustainability strategy around EcoBoost, a downsize and boost approach. Ecoboost , which involves turbo charging and boosting of engines, will deliver up to 20 percent fuel economy improvements (and up to 15 percentCO2 reductions) without sacrificing performance, and with a faster payback for consumers than other higher priced technologies.

CHRYSLER: It depends on the customer. The more choices and/or "tradeoffs" that are available, the more it will vary. It is likely that people will move towards a smaller vehicle but not necessarily a compact. A migration from full-size to mid-size is possible.

TOYOTA: All of the above except safety. Smaller and lighter cars are being favored. Consumers are showing a willingness to pay a premium, as long it is not a large premium. That's why Toyota sold more than 170,000 Prius last year.

J.D. POWER: There are several trade-offs, although it's somewhat of a myth that smaller cars and trucks are automatically less safe than larger trucks. Recently released crash test results showed that the Hummer H3 did not receive a top score for frontal impact, even though it looks like a big, safe truck. For hybrids, the biggest trade-off is the price premium which is typically around $5,000 for a full-hybrid or $1,500 for a mild hybrid such as the Saturn Aura or Vue. Car buyers are reluctant to compromise on size or safety, but are willing to pay a premium in exchange for savings on fuel. Horsepower, although desirable, is the feature that buyers are most willing to compromise on.

Going forward, will fuel efficiency be driven by gas prices, federal mandates or both?

TOYOTA: Both ... and more. More and more consumers are being driven by a concern for the environment.

GM: Both. Although, I would add again that customer preferences and behavior play a role here.

Longer range, fuel efficiency will be impacted by technology breakthroughs and alternative fuel infrastructure and availability.

CHRYSLER: Both, but there will be points in time when one will be stronger than the other.

HONDA: Both. However, Honda has been focused on improving fuel efficiency for over 30 years, and that commitment will continue to have an impact on each new car or truck that we introduce regardless of changes in federal mandates.

J.D. POWER: Fuel efficiency will be driven mainly by gas prices in the short term, but by federal mandates in the long term. The [new federal] standard for 2020 is 35 mpg for both cars and trucks, so car manufacturers have to aim for that number regardless of what future gas prices are.

How big of a role will alternative fuel and advanced-technology vehicles -- hybrids, diesels, flex fuel, electric vehicles, fuel cells -- play going forward? In 10 years, what percent of new vehicle sales will they account for? 20 years? What's real, what's not?

HONDA: Ultimately, Honda believes that fuel cell vehicles, like the FCX Clarity, represent the best long-term solution to the problem of developing clean sustainable transportation that will meet the needs of real consumers. I can't really provide an exact timeline toward that solution. It will certainly be several more years before fuel cell vehicles represent a large part of new car sales, and Honda is committed to supporting other alternatives including natural gas, clean diesel and hybrids. Honda intends to increase our sales of hybrid vehicles to represent approximately 10 percent of worldwide volume by around 2010. A large part of that increased volume will come from an all-new dedicated small hybrid vehicle set to be introduced in 2009.

FORD: It would be difficult to know precisely how the market will look in a decade, but we believe the gasoline internal combustion engine will be with us for quite some time -- and we continue to refine and improve the engines to obtain higher fuel economy. Flexible-fuel vehicles will play an important role and we have pledged to double our production of FFVs by 2010. While hybrids may remain a small piece of the overall market, we recognize there is a demand and we are expanding our hybrid lineup. As for electric vehicles and fuel cells, it is too early to predict what size of the market they could represent a decade or two from now.

Certainly all of the technologies are real and are either already on the road or under development. Perhaps the question to ask is what's affordable for consumers -- what is a practical, realistic approach to meet both consumers' and society's demands.

GM: All these options will be critical and play a role in the future. There is no "silver bullet" solution that works for all consumers or in all markets. That's exactly why GM's entire advanced propulsion strategy is aimed at bringing all these options to market. We will deliberately offer a broad range of clean and efficient vehicles, powered by different sources of energy, in order to respond optimally to local consumer needs around the world. Our strategy includes multiple paths:

• Continuing to improve the traditional engine and transmission with advanced technologies such as active fuel management, direct injection, turbocharging, six speed transmissions, and variable valve timing; and with the use of alternative fuels like E85 ethanol.

J.D. POWER: J.D. Power and Associates expects alternative fuels to account for around 40% of sales in 10 years. (14-15% diesel, 12-15% flex-fuel and 9-10% hybrid.) In 20 years -- hard to say. We don't forecast that far, but we expect that it will be significantly higher than in 2018 and there will be some fuel cell vehicles in the mix.

Where are you focusing your alternative-fuel efforts? Why?

TOYOTA: At Toyota, we see gas-electric hybrids as a core technology. We plan to sell more than a million hybrids per year globally sometime (early) in the 2010s. We will offer a hybrid variant on every passenger car in our lineup sometime during the 2020s. We think hydrogen fuel cells, plug-in hybrids and pure electrics along with cleaner diesels will be part of the mix, based on regional demands and energy issues.

GM: One way we're working to reducing oil consumption, oil imports, and CO2 emissions, is by offering vehicles that run on alternative fuels, such as ethanol. And, very importantly, we're promoting development of improved alternative fuels, such as cellulosic ethanol. Why? Because the increased use of alternative fuels like ethanol offers the best near-term solution for significantly reducing our reliance on petroleum. That's why we announced in January that GM is partnering with Chicago-based Coskata to help put its unique and highly efficient process for producing ethanol into commercial application as soon as possible. Coskata produces cellulosic ethanol from biomass and household waste. It produces up to 84 percent less CO2 than gasoline production, costs less than $1 per gallon to produce, and uses less than a gallon of water to produce a gallon of ethanol, about 75 percent less water use than today's ethanol production.

There could be 18 million flex-fuel vehicles on the road in the next five years. There are more than 6 million on the road in US today. In the U.S., GM has more than 2.5 million flex-fuel E85-capable vehicles on the road and has committed to have 50 percent of annual volume E85 capable by 2012. GM has announced partnerships in 15 states to locate more than 300 new E85 ethanol fueling pumps at stations in these areas. GM will continue to establish more such partnerships. For the 2008 model year, GM offers 11 E85-capable vehicles. Globally, by the end of 2008, GM will offer 25 flex-fuel cars and trucks, in several brands, and produce more than 1 million new ethanol-enabled vehicles. So, our commitment is solid.

HONDA: Though Honda believes fuel cell vehicles are the ultimate solution, it is not putting all of its eggs in one basket and believes there will be several bridge technologies supporting different driving needs. We are the only manufacturer offering a natural gas vehicle option continuously since 1998 with the Civic GX. Honda introduced the first hybrid for sale in the US with the Insight in 1999 and recently unveiled the new i-DTEC clean diesel engine that will make its US debut in an Acura model in 2009. Continued advancements in internal combustion engine technology will be critical since the internal combustion engine is not going away in the near future.

FORD: We have developed a near-, mid- and long-term sustainability strategy related to climate change and energy security, which outlines our approach to increase fuel efficiency and reduce greenhouse gas emissions. Ford's fundamental principle is to implement solutions that are economical and efficient, such as EcoBoost. We believe EcoBoost can make a significant difference because it will impact not just hundreds or thousands of vehicle, but millions of vehicles. Other technologies for the short-term include more use of fuel saving six-speed transmissions and dual clutch systems as well as better battery management systems, improved aerodynamics; hybrid-electric powertrains; diesel engines and electric power assisted steering.

We are also moving to increase our hybrid offerings -- with two additional hybrid models (Ford Hybrid Fusion and Mercury Hybrid Milan) going into production later this year.

Our mid-term (2012-2020) strategy includes significant vehicle weight reduction through the use of more lightweight materials and expansion of EcoBoost to the majority of our vehicle lineup.

Longer term, we are working toward commercialization and affordability of more advanced technologies, including plug-in hybrids. To get to that point will require overcoming current obstacles related to battery technology, durability, reliability and, of course, cost. We are also continuing our development of hydrogen fuel cell technology, but again, commercialization faces significant hurdles including cost and lack of a hydrogen infrastructure.

CHRYSLER: Absolutely, much like in Europe where diesel is very prevalent, different consumer needs will drive fuel/technology choice. Big cities, for instance, may lean towards electric cars because of the short commutes in traffic.

HONDA: There will indeed be regional differences. Using the Civic GX natural gas vehicle as an example, Honda began retail sales in California, where public refueling stations for NGVs are more readily available. In 2006, Honda was able to begin retail sales of the GX in the State of New York after the infrastructure advanced enough to meet customer needs. As we move forward with the introduction of the FCX Clarity this summer, Honda will follow the same example and lease vehicles where the infrastructure has seen the most development, in Southern California.

FORD: For ethanol or other biofuels to be a real player in the transportation sector and lessen America's dependence on foreign oil, we need a strong, long-term focus on policies that increase U.S. ethanol production and accelerate E85 infrastructure development. We need national research efforts to pursue producing ethanol from more energy efficient cellulosic materials like rice straw, corn stover, switch grass, wood chips or forest residue. Until cellulosic ethanol becomes viable, then it's likely that corn-based ethanol will remain regionalized in places where it is more widely available and affordable to produce.

TOYOTA: It's not just about vehicle requirements, it's also about energy issues. But yes, Toyota believes in the adage "the right vehicle, in the right place, at the right time." Carbon free electrical power (wind, hydroelectric and solar produced) will make plug-in hybrids more practical (and environmentally favorable) than in areas where electricity is produced by coal-burning plants.

J.D. POWER: We don't really do regional analysis, but there are definitely more hybrids sold on the coasts where gas prices are highest, and more flex fuel vehicles sold in the Midwest where most of the ethanol filling stations are.

Given the food vs. fuel debate, are E85 and biodiesel ideas who've time have come and gone? Or do federal mandates pave the way for a long ethanol future, but as a 10 percent blend at the pump, not E85?

GM: We do not think so and maintain our commitment to E85. We believe E85 still has a big large role to play. The new Renewable Fuel Standard (36 million gallons of ethanol produced in the United States annually by 2022) will require use of greater concentrations of ethanol than just E10. The food vs. fuel debate is a bit of a red herring. Some animal feeds have gone up in price in part due to rising prices for corn. But there is ample corn to feed people and make fuel. Growing demand for food in nations like India and China have a big role in the demand for food and short harvests in other nations (i.e. Australia and New Zealand) have as much or more to do with the issue as corn-based ethanol. Also, as previously mentioned, the real potential lies with cellulosic ethanol.

TOYOTA: There is a place for ethanol, but many, many challenges ahead. More important than food vs fuel is the issue of water availability challenges.

FORD: We believe biofuels can play an important role in transportation going forward, with the highest potential coming from second generation biofuels or cellulosic ethanol. Significant use of biofuels in a higher percentage than the current blend of 10 percent could have a major impact on reducing petroleum consumption.

HONDA: Honda believes that cellulosic ethanol, which is produced from agricultural waste, is a better option than ethanol produced from food stocks. Honda does sell flex-fuel versions of the Fit and Civic in Brazil where ethanol is both readily available and is not produced from food stocks.

CHRYSLER: That's a good question for a company that makes fuel. We build cars. ;)